RESPONSE TO WORKING GROUP AND P UBLIC COMMENTS ON THE S ITE C CLEAN ENERGY P ROJECT ENVIRONMENTAL IMP ACT S TATEMENT

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1 RESPONSE TO WORKING GROUP AND P UBLIC COMMENTS ON THE S ITE C CLEAN ENERGY P ROJECT ENVIRONMENTAL IMP ACT S TATEMENT Technical Memo PROJECT COSTS MAY 8, 2013

2 Subject: Project Costs Purpose A number of comments received during the Comment Period raise the question of whether the Project cost estimate is accurate as well as additional questions regarding the financing of the Project. The purpose of this Technical Memo is to summarize the information on the project cost estimate and other financial information provided in the EIS. Project Cost Estimate The capital cost estimate for the Project is $7.9 billion in nominal ( as-spent ) dollars, and includes adjustments for inflation effects and the cost of financing during construction. This cost estimate was prepared in 2010 based on the current design (as described in Volume 1 Section 4 Project Description) and market prices for labour, equipment and materials. Details on the Project cost estimate are provided in Volume 1 Appendix F Part 1 (Project Cost Estimate). For convenience, this Technical Memo reproduces Table 1 from Volume 1 Appendix F Part 1 showing the composition of the project cost estimate. The capital cost estimate has undergone both internal and external review. The capital cost estimate was prepared by the Project s Integrated Engineering Team, consisting of BC Hydro staff and consultants. In addition, the capital cost estimate was reviewed by BC Hydro estimators and has undergone an external peer review by KPMG. This external review concluded that the methodologies and assumptions used in the cost estimate were appropriate. 1 The Project cost estimate is characterized as a Class 3 cost estimate as defined by the Association for the Advancement of Cost Engineering, and includes appropriate amounts of contingency and reserves. As stated in AACE 2012: Class 3 estimates are typically prepared to support full project funding requests, and become the first of the project phase control estimate against which all actual costs and resources will be monitored for variations to the budget. They are used as the project budget until replaced by more detailed estimates. As stated in Volume 1 Appendix F Part 1 (Project Cost Estimate), BC Hydro expects project costs to be within the bounds of the current capital cost estimate in ordinary market conditions. Project Financing and Recovery from Ratepayers BC Hydro receives its financing through the Province of British Columbia. All of BC Hydro s debt is either guaranteed or held by the Province of British Columbia. The credit rating of BC Hydro s 1 Volume 1 Appendix F Part 1 Project Cost Estimate, page 2. TECHNICAL MEMO PROJECT COSTS Page 2

3 guaranteed debt is reflective of the credit ratings of the Province which is currently rated AAA by Standard and Poor s and Aaa by Moody s bond rating agencies. The Utilities Commission Act gives the BCUC the power to regulate BC Hydro and provides BC Hydro the ability to recover its costs (debt servicing and other) by way of application. As stated in Section 7.1.3, Costs associated with generation projects are recovered from ratepayers based on the revenue requirements collected by BC Hydro, as regulated by the [BCUC] The manner of cost recovery is determined by the BCUC. As described on page 7-4, this recovery from ratepayers is made up of: Operations costs Financing costs (i.e. interest on debt associated with the project) Amortization of the project capital cost (depreciated over a period as determined by accounting principles and accepted by the BCUC) A regulated return on equity on the capital invested in the project The debt associated with the Project would be effectively paid off through the recovery of the amortization of the project capital cost. For the purposes of the analysis provided in Sectio 7.1.3, BC Hydro has assumed amortization of the project capital costs would take place over the financial planning life of the project (i.e., 70 years). As noted, this recovery term is subject to approval by the BCUC and may therefore differ from these assumptions. TECHNICAL MEMO PROJECT COSTS Page 3

4 Excerpted tables from Volume 1 Appendix F Part 1 Project Cost Estimate (Page 2) Table 1 Project cost estimate breakdown ($ million) Dam and Associated Structures 1,790 Earthfill Dam Approach Channels & RCC Buttress Spillway, Intakes & Penstock Left (North) Bank Stabilization Cofferdams, Dikes, Diversion Tunnels Power Facilities 990 Powerhouse & Switchgear Building Stations and Transmission Offsite Works 530 Highway 29 Relocation, Access Roads, Clearing, Land & Rights Construction Management & Services 515 Worker Accommodation Construction Management & Construction Services Total Direct Costs 3,825 Indirect Costs 1,005 Development Costs, including sunk costs Regulatory Costs Construction Insurance Management & Engineering Mitigation & Compensation Contingency 730 Total Construction and Development Costs (2010 real dollars) 5,560 Inflation 790 Interest During Construction 1,550 Total Construction and Development Costs (nominal) 7,900 TECHNICAL MEMO PROJECT COSTS Page 4

5 Related Comments / Information Requests: This technical memo provides information related to the following Information Requests: Response to Peace Valley Environmental Association Standard Letters Response to Wilderness Committee Standard Letters form_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_0213_001 pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ pub_ ab_ TECHNICAL MEMO PROJECT COSTS Page 5

6 August 2013 INFORMATION SHEET COST ESTIMATE FOR SITE C Large hydro projects like Site C are cost-effective because after a significant upfront capital cost, they have low operating costs and a long life of more than 100 years. The Site C project would have an estimated capital cost of $7.9 billion. The project would produce electricity at a cost of $83 per megawatt hour at the point of interconnection, based on a real discount rate of 5 per cent. This would make Site C among the most cost-effective resource options to help meet B.C. s future electricity needs. The bottom-up cost estimate for Site C was updated in late 2010 and reflects key upgrades to the project design, and current market prices for labour, equipment and materials. It includes all construction and development costs, inflation, contingencies and interest during construction. The cost estimate includes an 18 per cent contingency on direct construction costs, and a 10 per cent contingency on development and management costs. An external peer review by KPMG determined that both the process for developing the assumptions and the construction of the financial model used in the cost estimate were appropriate. Site C and BC Hydro Rates BC Hydro electricity is currently among the most competitively priced in North America. This is largely due to BC Hydro s system of heritage hydroelectric projects, the costs of which have been depreciated and now produce electricity at a very low cost to ratepayers. Based on the analysis in the Site C Environmental Impact Statement (EIS), the project is expected to result in lower costs to ratepayers over the long-term than alternative resource options. There is no effect on today s BC Hydro rates from Site C, as costs of the project are deferred until the project begins generating electricity. This ensures that the costs for Site C are paid by the ratepayers who are benefiting from the project. Once the project is in operation, the BCUC will determine the period over which the costs are recovered from BC Hydro ratepayers. Typically, this would be over many decades. Site C would also improve predictability in customer rates. Operating costs would be stable and predictable because the majority of costs are incurred during construction and development. In contrast, for a thermal resource such as a natural gas generation facility, a significant portion of the costs are incurred during operations, largely due to the cost of fuel, which can fluctuate. GOVERNMENT REVIEW OF BC HYDRO In June 2011, a report by a government-appointed panel concluded that: Site C is a reasonable cost alternative to meet load growth. The panel noted that Site C is seen as cost effective, as the cost of energy compares favourably with other benchmarks for clean energy. The report is available at: - more -

7 COST ESTIMATE FOR SITE C -2- PROJECT COST BREAKDOWN Site C has an estimated capital cost of $7.9 billion, and it would have low operating costs over its lifespan of more than 100 years. The breakdown of the project cost estimate is below. PROJECT COST ESTIMATE BREAKDOWN Cost Estimate $millions Dam and Associated Structures $ 1,790 Earthfill Dam Approach Channels and RCC Buttress Spillway, Intakes and Penstock Left (North) Bank Stabilization Cofferdams, Dikes and Diversion Tunnels Power Facilities $ 990 Powerhouse and Switchgear Building Stations and Transmission Offsite Works $ 530 Highway 29 Relocation, Access Roads, Clearing, Land and Rights Construction Management and Services $ 515 Worker Accommodation Construction Management and Construction Services Total Direct Construction Costs $ 3,825 Indirect Costs $ 1,005 Development Costs Regulatory Costs Construction Insurance Project Management and Engineering Mitigation and Compensation Contingency (18% on direct costs, 10% on development and management costs) $ 730 Total Construction and Development Costs (real dollars) $ 5,560 Inflation $ 790 Interest During Construction $ 1,550 Total Construction and Development Costs (nominal dollars) $ 7,900 Site C requires environmental certification and other regulatory permits and approvals before it can proceed to construction. In addition, the Crown has a duty to consult and, where appropriate, accommodate Aboriginal groups. ABOUT SITE C The Site C Clean Energy Project (Site C) is a proposed third dam and hydroelectric generating station on the Peace River in northeast B.C. Site C would provide 1,100 megawatts (MW) of capacity, and produce about 5,100 gigawatt hours (GWh) of electricity each year enough energy to power the equivalent of about 450,000 homes per year in B.C. Subject to environmental certification, Site C would be a source of clean, renewable and costeffective electricity for more than 100 years. PO Box 2218 Vancouver BC V6B 3W2 Toll-free: Community Consultation Office th Avenue Fort St. John BC V1J 1Y5 Tel: sitec@bchydro.com